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The Effectiveness of World Trade Organization in Global Trade Governance

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In the aftermath of the Second World War, as part of the Bretton Woods institutions, the Western governments, led by the economic hegemon, the United States of America (US), pursued non-discriminatory and free trade policies through multilateralism principally to promote international co-operation and establish a stable and secure economic environment (Hoekman & Kostecki, 2001, p.479; Watson, 2017, p.454). Nonetheless, instead of the International Trade Organisation, an ad hoc regulatory instrument known as the General Agreement on Tariffs and Trade (GATT) was established in 1947 (Schwartz, 2010, pp.263, 265; Winham, 2014, p.115). GATT reflected the interests of the major states between free trade and domestic stability and thus focused on liberalising goods and excluded agriculture and services from international markets (Schwartz, 2010, p.264). The World Trade Organisation (WTO) was established in 1995 to replace the contractual-based GATT and continue its original mandate (Winham, 2014, p.126). Under the WTO, the multilateral system was extended to services, intellectual property rights and investment and included controversial GATT-issues such as agriculture and textiles. The system also brought the developing countries into the fold (Hoekman & Kostecki, 2001, p.479; Winham, 2014, p.126; Gil-Pareja, Llorca-Vivero & Martinez-Serrano, 2016, p.577). Most importantly, the formal Dispute Settlement Understanding (DSU), which was established to replace the earlier ad hoc system, provides greater economic security for smaller countries vis-à-vis the larger ones, thereby reinforcing the WTO’s position in international trade as based on rules than on power (Winham, 2014, p.126). This appears to conform to neoliberal institutionalism which places the WTO in the centre stage to solve collective problems and modify the behaviour of actors. However, the realists challenge this as the WTO continues to reflect the interests of powerful states (Allee & Scalera, 2012, p.245; Karns, Mingst & Stiles, 2014, pp.47-48, 55, 57).

Despite the gains of the multilateral system, trade negotiations stalled during the Doha Development Agenda (DDA). At the same time, Andrew K. Rose’s findings that membership in the GATT/WTO would not lead to an increase in trade could only dampen the slow progress in Doha further (Allee & Scalera, 2012, p.247). In addition, there was a resurgence of preferential trade agreements, of which more than 500 have been reported to the WTO, and there were fears that this could lead to either trade diversion, substitution of WTO rules, or fragmentation of the trading system (Hoekman, 2014, p.561). This appears to call into question the legitimacy of the WTO in international trade governance. This line of thinking is correct if the WTO is seen as an autonomous actor. In actuality, the WTO was created as a result of the distribution of power of Western states, especially the US, and it reflects their underlying interests (Krasner, 1982, p.199). In that regard, the WTO is effective to the extent that it reflects the interests of the states, that of the founders and the emerging powers in the global trading system.

Based on the above, three aspects will be addressed in this essay. Firstly, it will examine the criteria to measure effectiveness of international organisations, and how they apply to the WTO. Secondly, this essay will determine whether the WTO achieves its objective of increasing free trade and global economic welfare. Lastly, it will discuss whether the WTO can address the power relations in trade negotiation and dispute settlement.

In this first section, the criteria to evaluate the WTO’s effectiveness in trade governance will be determined.

Generally, Oran Young and Marc Levy (1999) proposed that there are five ways that effectiveness can be considered: problem-solving, legal, economic, normative and political (in Iida, 2004, p.207). Firstly, the effectiveness of an international organisation can be measured by whether it has solved the problems it was intended to solve (Mitchell, 2013, p.4; Levy, Young & Zurn, 1995, p.291; Iida, 2004, p.208). Whilst this is difficult to assess, the other types of effectiveness can be useful: the degree that conflicts are regulated by the rule of law, whether problems can be solved economically, the extent that normative values such as fairness and participation are achieved, or the degree that the international organisation can influence the behaviour of dominant and weaker actors (Levy, Young & Zurn, 1995, pp.291-292; Iida, 2004, p.208).

In the context of the WTO, two aspects of effectiveness will be analysed – problem-solving and political. The purpose of the GATT (and the WTO) as stated in the preamble of the 1947 GATT is to ensure global economic welfare — including more employment, lower consumer prices, greater economic growth and more efficient use of resources — through reciprocal arrangements that substantially reduce tariffs and other barriers to trade and eliminate discriminatory treatment (in Andersson, 2012, p.190). Hence, in this respect, the second section of this essay will evaluate whether the WTO meets the goals that it was created for, which is to increase trade liberalisation and enhance global economic welfare.

Further, in international organisations such as the WTO where power considerations are important, political effectiveness is crucial. In this, exogenous factors (such as the distribution of influence of dominant actors and the distribution of capacity of weaker actors) and endogenous factors (the design of the international organisation, its rules and procedures) work together to alter the behaviour of actors (Levy, Young & Zurn, 1995, pp. 295-299, 303). In order to carry out its purpose, the WTO has five major functions: to facilitate the implementation of agreements; to provide a forum for international negotiation; to settle disputes; to monitor and administer trade reviews; and to cooperate with the International Monetary Fund and the World Bank in economic governance (Hoekman, 2014, p.556; Anderson, 2016, p.56). In considering whether the WTO is effective in influencing actors’ behaviour, its procedures and rules in negotiation and settling disputes will be deliberated in greater detail in the third section of this essay.

In this second section, in order to assess whether the WTO meets its mandate in promoting free trade and enhancing welfare gains, the effects of the negotiation rounds will be considered. In addition, Rose’s empirical findings that challenge the merit of WTO membership will be evaluated in light of subsequent studies and in terms of its impact on the accession of countries.

In 1948, 23 countries — that accounted for 61% of world trade — signed the GATT. Subsequently, other countries joined and by 1995, there were 128 WTO members which represented 91% of world trade in 1994. In 2012, the WTO’s membership increased to 159 and they accounted for 97% of world trade (Anderson, 2016, p.78). Currently, there are 164 WTO members and 23 observer countries (WTO, no date). At the same time, as a result of the multilateral negotiating rounds under the GATT, tariffs have been progressively reduced, from an average of close to 40% in 1947 to the current average of 3.7% (Winham, 2014, p.124; Andersson, 2012, p.190). In addition, global trade has also increased and its growth is greater than that of global gross domestic product (GDP), indicating that the world economy is becoming more open to global trade. To illustrate, from 1970 to 2000, world export grew by a factor of 4.5 to $8.6 trillion, and it was double the value of global GDP (Watson, 2017, pp.452-453). Simultaneously, the WTO’s DSU plays a complementary role to clarify and ensure compliance to the rules. The increase in the number of complaints, including from large developing countries and the general compliance of dispute settlement results, give credence to the WTO’s effectiveness, and this will be discussed in further detail in section three.

The question of whether there is a correlation between the reduction of tariffs and the intended benefits has not been conclusively agreed upon by economists. As mentioned earlier, Rose found that the GATT and the WTO have not encouraged trade, due to either the extension of reduced tariffs to non-members or the insubstantial reformation of developing countries’ trade policies (2004, p.112). Many studies followed thereafter in which some researchers supported Rose’s point of view while others found that the GATT/WTO membership has large trade promoting effects. Still others took the middle path, where they found a moderate positive effect (Gil-Pareja, Llorca-Vivero & Martinez-Serrano, 2016, p.562). In terms of whether membership encourages trade creation, especially between countries that have not traded with each other before (known as extensive margin of trade) and those that have (intensive margin of trade), the results were again mixed (Herz & Wagner, 2011, p.1015; Anderson, 2016, p.78). They ranged from both margins being positive, to both being negative, and to only the intensive margin being positive (Gil-Pareja, Llorca-Vivero & Martinez-Serrano, 2016, p.562; Anderson, 2016, p.78). There is also further debate concerning trade effects between industrialised and developing countries as follows: there is a positive effect for both, a negative effect for both, or only a positive effect for industrialised countries (Gil-Pareja, Llorca-Vivero & Martinez-Serrano, 2016, p.562; Anderson, 2016, pp. 77-78). The differences in the results are due to different methods and data sets used in the econometric studies and as such, it may be difficult to reconcile the different results (Herz & Wagner, 2011, pp.1015-1016; Anderson, 2016, p.78). Suffice to say that though precise benefits of WTO membership have not been established, and research in this area is likely to continue, this has not deterred developing countries from joining the WTO.

Developing countries are interested in joining the WTO not to profit from the direct welfare gains, but rather because membership signals certainty that liberalisation policies will be adopted by these countries, garnering them greater access to the global financial market (Watson, 2017, p.455). The powerful WTO members are aware of this motivation and as such, they have increasingly used the accession process to impose stringent conditions on the entry of new members (Watson, 2017, p.455). For example, the accessions of China and Saudi Arabia spanned multiple decades and required significant trade liberalisations (Allee & Scalera, 2012, p.248). In the case of China, many WTO members foresaw that their domestic industries would be further threatened by cheap Chinese imports and would only accept China in the multilateral system under two conditions. Firstly, the Chinese economy would need to be market-based, and secondly, government intervention (whether from central, provincial or local state bodies) should be limited. Further, to protect the interests of their business constituencies, the negotiations went beyond market access to required reforms to ensure transparency and a level playing field in China (Hoekman & Kostecki, 2001, pp.403-404).

In truth, by joining the WTO, developing countries profit from making the required policy reforms, opening up trade in goods and services and specialising in production that they are most competitive in. M.-K. Tang and S.-J. Wei (2009) showed that the GDP growth rates of the pre- and post-accession period of acceding developing countries were greater compared with the non-acceding ones (in Anderson, 2016, p.81). In another study, countries with a lower level of development gained the most from participation in the multilateral trading system (Herz & Wagner, 2011, p.1030). Apart from that, C.A. Primo Braga and O. Cattaneo (2009) emphasised that WTO members have access to impartial dispute settlements and to lower trade negotiation costs. In addition, they can participate in international trade rule-making and can enjoy an improved business environment for domestic and foreign investors (in Anderson, 2016, p.79).

Thus far, the WTO has generally been effective in achieving its mandate in reducing tariffs and ensuring compliance to the negotiated rules, and further liberalisation will continue in areas such as agriculture. Further, there has been an increase in trade flows since the 1970s. Even though there is no consensus amongst economists on the benefits of joining the WTO, this has not stopped the accession of new members who join based on their own interests. Powerful WTO members force concessions on the applicants to protect their own interests, further strengthening the claim of realists. The interests of states will continue to be explored in the next section which will discuss the WTO’s political effectiveness.

In this third section, the role of the WTO in ensuring a level playing field between the industrialised and developing countries are considered with respect to procedures related to negotiation and dispute settlement.

In the past, trade negotiation has been decided in advance by the Quad (the US, the European Union (EU), Japan and Canada) to ensure that their interests are met. However, with the rise of emerging economies during the DDA, Brazil and India (joined by China at a later stage) have participated in setting the agenda and representing the interests of developing countries in agricultural issues, as the majority of developing countries continue to lack their own voice. This reflected the responsiveness of the WTO to shifts in the balance of power (Watson, 2017, p.456; Narlikar, 2010, p.717). The WTO Ministerial meeting in 2008 which involved 153 members demonstrated the important role played by emerging powers. For practical reasons, a concentric circle method was used for negotiation. At its core, there were seven of the most influential members — the US, the EU, Japan, Australia, Brazil, India and China — to represent the interests of the others and to be in the driver’s seat. The second concentric circle consisted of 30 members, and the final circle, where all the formal decisions were made, comprised all 153 members (Ahnlid, 2012, p.71). The process worked as the breakthroughs made by the core group were communicated to the second, which also sought buy-in and support from all other countries. Due to transparency, inclusiveness and the trustworthiness of the chairman, tremendous progress was made at the meeting (Ahnlid, 2012, pp.83-85).

However, despite the progress made, there was still a deadlock. The main reason for the failure is that the major powers, notably the US, the EU, India, and China, believe that it is not in their respective interests to accept the terms on the table (Hoekman, 2014, p.558). The US, cognisant that it is no longer the unchallenged economic hegemon in previous GATT and WTO negotiations, will only make the deal if it is deemed acceptable to its domestic constituency and the US Congress. India is interested in expanding market access, but, it must be on just terms. The EU and China are already enjoying the status quo, as EU’s big businesses at present are operating in China, and with China being the global workshop also reaping those benefits, economic interests are not a motivating factor for either party (Andersson, 2012, pp.197-203).

In terms of trade negotiation, it can be seen that member states uphold their respective interests. However, it is different with regard to the DSU. Firstly, it is noted that there is an extensive use of the system indicating that there is a perception of effectiveness. In comparison with the GATT, where there were a total of 207 cases filed from 1948 to 1989, as of October 2003, there were already more than 300 complaints filed with the WTO (Iida, 2004, pp.211-212). The major participants were the US and the EU (later joined by China), and from 2000, there has been an increase in participation by developing countries that accounted for a little less than a third of complaints. Nevertheless, an uneven usage has been detected, where Egypt, Thailand, India, Brazil and China were the active users. (Davey, 2014, p.687; Hoekman & Kostecki, 2001, pp.393-394). Secondly, the DSU has been effective in resolving disputes or ensuring compliance. Many of the disputes were settled at the consultation stage, including about half of those surveyed between 1995 and 2002 (Davey, 2014, pp.687-688). Of those disputes that have resulted in panel and Appellate Body reports requiring remedial actions to comply with WTO rules, based on studies conducted, important trading nations such as the EU and the US have generally implemented the adverse decisions, though some were not implemented promptly. In addition, China’s record of implementation has also been good (Davey, 2014, pp.694-695).

The effectiveness of the WTO in ensuring that parties behave according to the rules is a strength of the dispute settlement system. A case in point is the extraterritorial application of unilateral sanctions by the US. There has been a long history where the US has defied and blocked GATT’s rulings and applied its unilateral measures through Section 301 of the 1974/1988 US Trade Act to retaliate against countries that had policies that were detrimental to American exports (Iida, 2004, p.215; Tussie & Woods, 2000, pp.64-65; Hoekman, 2014, p.555). One of the first disputes raised by Japan at the WTO was the threat by the US under Section 301 to impose 100 percent tariffs on the import of Japanese luxury automobiles. An early settlement was reached two months later, and the US not only withdrew its sanctions, it also did not threaten to use them against Japan in the subsequent dispute (Iida, 2004, p.215; Davis & Shirato, 2007, pp.308-309).

Nevertheless, political effectiveness of the WTO in altering behaviour of actors towards reducing barriers or discriminatory treatment may sometimes not reach the yardstick of full compliance. This is illustrated through the resolution of the Bananas case, which is the longest dispute in the history of the multilateral trade system. The dispute, which involved the discriminatory EU regime for importation of bananas as well as the US and several Latin American countries, formally ended in December 2012 (Davey, 2014, p.692; Shlomo Agon, 2014, p.119). Apart from criticisms of delay, the mutually accepted settlement also falls short of full compliance with the WTO agreements. Rather than consider this as a failure in the narrow compliance lens, the broader goals of containing the dispute within the WTO thereby sustaining the regime and its underlying norms and facilitating the settlement that preserves the negotiated balance of concessions, should be given precedence (Sholomo Agon, 2014, p.120-122). More importantly, it is the recognition that strict legal compliance may be less suitable in cases involving high intense conflict and national policies of great economic, political and symbolic importance. In that regard, in order to be politically effective, the WTO needs to interface between political interests and the rules.

Even if the DSU can be considered legally or politically effective, there is merit to improve the timeliness of decision making and increase efforts to ensure broader participation of developing countries. For example, the median time for panel reports could be seventeen months, which is twice as long as the nine months specified in the DSU. Similarly, the median time for issuance of appellate reports was seven months, which is longer than the maximum of five months under the DSU (Davey, 2014, p.692). This delay could dull the effectiveness of dispute settlement, as countries would need to factor this as a cost before initiating a complaint. This could also possibly affect developing countries negatively.

Dispute settlement has generally been underutilised by developing countries especially in the sub-Sahara region. Both negotiation and dispute settlement are integral tools to advance the interests of developing states (Agius, 2012, p.141; Hoekman & Kostecki, 2001, p.395). As a step in the right direction, an Advisory Centre on WTO Law was created to assist developing country members that are involved in dispute settlement (Hoekman & Kostecki, 2001, p.397). This will assist in addressing the cost considerations and lack of legal expertise faced by developing countries and allow them greater access to the system (Iida, 2004, p.217). By addressing the capacity of the weaker actors, this will allow the WTO to be more effective in influencing the behaviour of actors and in so doing, meet its purpose.

It can be seen that trade negotiation in the WTO continues to be subject to the respective power interests of its members. With respect to dispute settlement, there is generally compliance to WTO rules, though politics and power interests continue to play a role, as shown in the Bananas case. By addressing the capacity of weaker actors, this increases the effectiveness of the WTO in meeting its purposes.

In conclusion, it has been shown that the WTO continues to remain relevant as an instrument for global trade governance as its current membership constitutes about 97% of global trade and there has been substantial reductions in tariff. There will continue to be vigorous debate on the precise value of trade benefits arising from WTO membership. However, decisions to join the WTO are based on states’ interests rather than any direct welfare gain to be achieved from the system. Powerful WTO members also view accession process in light of their respective interests. In that regard, the WTO has been effective in achieving its trade liberalisation objectives and in accommodating the interests of states. The WTO has been sensitive to shifting balance of powers and have included emerging powers such as Brazil, India, and China in decision-making positions. As such, outcomes of trade negotiations such as the DDA will depend on the interests of the US, the EU and the emerging powers. In terms of dispute settlement, there has generally been compliance to WTO rules. However, power interests have not completely been outside the rules-based system especially in cases of high politics. Consequently, the WTO’s role in interfacing between law and politics and in enhancing the capacity of weaker actors are critical to increase the political effectiveness of the WTO. The WTO will continue to be an effective instrument in global trade governance to the extent that it achieves the balance between rules and political interests.

Karen Woo, B.Com., LL.B, PgDip and LL.M, is currently pursuing MA International Policy and Diplomacy with Staffordshire University, UK on a part-time basis. She is working in Malaysia with the telecommunications regulator on ways to promote competition. Previously, she worked on systems integration and subsequently, she was a consultant with KPMG. Her areas of interests include international issues relating to international relations, Internet governance, Intellectual Property and multilateral trade.

Shlomo Agon, Sivan (2014), ‘Is It All About Compliance? Towards a Multidimensional Goal-Based Approach for Analyzing the Effectiveness of the WTO DSS’, American Society of International Law. 108 pp.118-122.